Brent Willet on Economic Development Incentives

Don’s Introduction

I have my personal view of economic development incentives, but decided to post this article written by an economic developer from Iowa.

Here is my take in a nutshell. The use of incentives is a global practice; it occurs on all continents. I wish we could do away with all economic development incentives everywhere. I know that isn’t possible. Unilateral disarmament is suicidal; that is if your county or state does away with them and others don’t, you will pay a price by losing deals. Incentives are costly in many cases, and they are not fair in the sense that some firms get them and some don’t.

Considerable confusion exists on which deals, companies, and industries should be incentivized. Picking winners and fixing losers with incentives is a form of government industrial policy, which second guess the market and often open the door to favoritism and irrational use of public resources. We have a long way to go in understanding the real “economics” of economic development. Ashtabula County’s new economic and community dashboard can bring greater rationality in defining the future role of the public sector (government and quasi-governmental entities) in Ashtabula County’s economic development process.

Bear in mind that in my 35 years in economic development, I led a study effort of the fiscal and economic impact (costs and benefits) of all of Ohio’s economic development incentives, I served on the State of Ohio’s Tax Credit Authority, I conducted numerous economic impact studies on incentives, I have done deals with incentives at the local level, and I have helped to design new and eliminate old incentives. As I look back, I wish we would fix the underlying problems (weak government “business” climate, labor market problems, image shortcomings, tax policy flaws, etc.) that incentives seek to compensate for.

I’ll stop here and allow you to read Brent Willet’s article, which makes some valid points, but also advocates some views I can’t buy. I don’t buy his overall conclusion.

Modern economic development – which tracks its origins to the formation of local industrial recruitment organizations in response to the economic downturn of the late 1970s – has always seen its practitioners grapple with persistent public controversy and skepticism regarding the negotiation and application of publicly-funded incentives to secure jobs projects for communities. Economic developers have struggled since the early days of the profession to explain the role incentives play in the recruitment of human and financial capital.

Incentives play a fundamental role in securing job- and wealth-creation projects for communities in every corner of this country and in many countries of the world. This is pure, unadulterated fact.

Public sector incentives are as principal to the decision-making process for most projects of size as is real estate and talent. There is plenty to discuss about whether this should be the case, or whether some federal edict ought to materialize prohibiting states and communities from competing with each other with incentives – something some policy makers and lots of armchair quarterbacks in the media are calling for – but that’s a topic for another blog. I will note what’s glaringly obvious: there is no national legislative cavalry coming. Such a decree would be impossible to implement and enforce and would create an enormous macroeconomic disadvantage for the United States in a global economy.

Incentives used to get good deal done

Incentives are not boogeymen. Most economic developers subscribe to the sentiment that public financial inducements are designed to get a good deal done, not make a bad deal good. Put another way, incentives, when applied judiciously and as the result of a vigorous and transparent negotiation, have as central and appropriate a role in our public system of government as any basic government service. Incentives play a critical role in ensuring that millions of dollars of future tax base and thousands of jobs matriculate in our state or country rather than another, but the economic development profession has generally done a poor job of communicating this. As a result, the public, fueled by a general distrust in government and distaste for corporate America, has grown increasingly indignant about the use of incentives to grow and retain jobs and capital in states like Iowa. Such indignation, and the predictable political posturing on the part of elected officials it spawns, poses real threats to future economic growth in our state and nation.

Judicious negotiators of incentives in Iowa and around the country have an image problem which is threefold.

Impersonal impact of project

First, we’ve grown accustomed in economic development circles to communicating the substance of incentivized projects in banal, aggregate terms that mean nothing to the average person. When an economic developer or organization reports that a local employer has agreed to a $20 million expansion which will create 35 new jobs, it’s often a single-day news story, thanks to the two-dimensional nature of how the project’s human and financial community impact is framed [or ignored]. We’ve got to get better at personalizing these projects, communicating the human impact of each new job and what it means to your family and your community – a job which may offer a struggling single parent or determined ex-offender an opportunity to improve their lot in life.

Because most economic developers have our professional performance, at least in part, evaluated based on aggregate job and capital creation, we’ve convinced ourselves that those blocky cumulative figures – instead of broadly accessible accounts of how these projects improve lives in our communities – are what matter to citizens wearily observing the use of public funds to grow business in Iowa communities. Too often we report to the public through the lens of our performance metrics exclusively when the qualitative, human impact of our work is the most compelling.

Incentives fundamental to competition for projects

Second, we’ve been married to the ‘need-based’ narrative in incentives negotiation for far too long. While the concept of ‘need’ in negotiating incentives is sound – it suggests that public sector decision-makers only agree to incentivize a project to the absolute minimum extent necessary to vanquish our opponents and secure the project for our community and state – the word is a problem. Major companies do not, in a semantic sense, ‘need’ the financial allocations made available to them for most projects. The balance sheets of Fortune 500 companies do not see an impact as the result of, for example, a package of tax credits or forgivable loans from a state or community. What’s needed is an effective mechanism to quantitatively communicate the central role incentives play in adjudicating a complex sales process and leveling the competitive playing field upon which job and wealth creation projects are fought for.

Let’s educate the public on the fact that in lieu of not-going-to-happen federal intervention, public incentives are a fundamental competitive component of any major project negotiation. We should find new ways to demonstrate this – to drive home the fact that failure to maintain and enhance a robust competitive incentives posture in Iowa is comparable with a business failing to reinvest in its own people and product. And when that happens, the business shrinks and dies.

We need to educate the public about the competitive field our communities are playing on for jobs projects and communicate the fact with more depth than our pat answer that ‘in a perfect world, we wouldn’t have to use incentives.’ Of course not. I’ve never lived in a perfect world; have you? We have an opportunity to elevate the discussion in Iowa and around the country to an informed one which considers the basic role incentives play in business decision-making today.

Incentives aren’t all cash

Finally, economic developers like me have turned in woeful performances in clearly communicating the complexity of the incentive tools we use to land projects in our communities. The public is confused about what economic development incentives actually do, and what they cost. Fueled by media reporting which is at best inaccurate and at worse misleading and pronouncements by some policy-makers who have determined that being against incentives is good politics, incentives have been teed up, demagogued and reduced to a single, wholly erroneous narrative: incentives are all cash out of the taxpayer’s pocket.

Not true. While most communities and states maintain so-called ‘deal closing funds’ which provide governments the capability to include a certain amount of performance-based cash (Iowa has one of the smallest of these funds found anywhere in the country, and has for years) the vast majority of incentives awarded in Iowa are credits against future revenue, or tax credits.

Simply put, tax credits are instruments to provide a reduction in tax liability for future investments by a company- tax revenue we currently are not enjoying when agreeing to the incentive [because the project and its associated investment have not yet occurred]. Far too often, the total value of a tax credits package [which can include credits against state investment tax, local property tax and other tax streams] are represented to the public as cash, as, in effect, a check written by the government to the company.

Couldn’t be further from the truth! In virtually all cases, tax credits are awarded not only after the company creates the tax liability, but after it physically creates the revenue by paying its taxes. Only after the new tax receipts are received by the state and local governments does a company receive a credit back. This is completely lost on most members of the public, and it’s on us as economic developers to find better ways to communicate the complexities of incentives packages so that their fiscal impact is truly understood. Tax credits are but one example in a roster of complex local, state and federal incentives programs most people don’t understand [why would they?] but which we have to get better at demystifying.

I suggest above the economic development image problem has three components, but realistically it has many more. Virtually all incentivized projects in Iowa carry with them stringent ‘clawback’ provisions which legally compel the awarded company to pay back all or some pro-rated portion of any incentives it receives should it fail to fulfill its obligations related to job creation, wage levels, capital investment and the like. Now consider the last time you read a detailed account of a successful clawback executed by a government from a company for failing to fulfill its obligations. Part of this is a volume issue – the men and women who negotiate incentives packages across this state are, by and large, excellent stewards of public funds and only recommend packages which have a high probability of success. So clawback scenarios are not particularly common. But when they do happen, most economic development and other officials engaged in the process don’t court publicity for the process. I would submit that we can do a better job in the profession of educating the public when we do experience a clawback situation to make the public aware of the aggressive stewardship those responsible for overseeing compliance with economic development incentives demonstrate every day.

Another element of the economic development image problem? New Iowa legislation in 2014 concerning how cities and counties report tax increment financing [TIF] activities now requires local governments to report their property tax credit-against-revenue figures at a ‘not to exceed’ level, which artificially makes project property tax incentives look enormous and is in most cases completely out of step with actual credit values.

I could go on. I will not. There is much work to do to better educate the public on what public sector incentives mean and how they are used. It is incumbent upon every stakeholder in the field of economic development – practitioners, elected officials, even companies utilizing the incentives – to find new ways to communicate the substance and the value behind such a controversial, and important, topic.